Sweetheart deals: fear of tears

Wealth managers are using sweetheart deals to attract and retain advisers and their funds under management, despite fears that continued weak markets could put pressure on their balance sheets if a large number decide to take up the terms.

The “buyer of last resort" contracts, under which
AMP
/AXA,
National Australia Bank
’s MLC and other major wealth managers offer planners the right to sell their business back to them at a later date, continue to be a key part of their recruitment strategy, according to advisers.

Offers range from 2.75 to three times and 3.5 to 3.8 times annual recurring revenues, depending on the quality of the business and wealth manager.

Decades of highly favourable deals for advisers could come back to haunt the wealth managers if there was a surge in departures caused by tough economic conditions or concerns about regulatory reforms, analysts and consultants said.

The companies deny there is an issue, claiming they have not experienced any spike in departures.

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But Bob Neill, a director of Sea­view Consulting, which specialises in financial services, said: “The wealth managers may not have been writing a lot more cheques in the past 12 months but the likelihood is that they will in the future.

“The exit options they have [with planners] are much higher than the market values of their businesses."

A recent Wealth Insights survey found 15 per cent of advisers whose dealer groups were owned by the banks or AMP/AXA were likely to exercise the option if proposed government reforms to the industry came into effect. Another 13 per cent said they were considering it.

Stewart Oldfield, analyst for Investorfirst Securities, said: “As the prices of planning businesses fall on the open market in the wake of the global financial crisis and the proposed introduction of federal government reforms, the increased take-up of these buyer of last resort (BOLR) arrangements are putting pressure on the balance sheets of those same institutions."

A spokesman for AMP/AXA said it was not an issue. Banks with advisory networks also played down any increase in take-up.
IOOF
’s annual report noted it was in discussion with one adviser connected with subsidiary Bridges Financial Services.

“We have not experienced any substantial increase in BOLR contracts being triggered," a MLC spokesman said.

He said that advisers had replaced a set formula favouring in-house products with an independent market valuation process.

AMP is believed to be paying four times recurring earnings for advisers, dependent on the portfolio mix and advisers’ tenure with AMP, according to industry sources.

AXA’s three-times recurring earnings is believed to have been recently changed from a “floor to a ceiling price," according to the sources.

“The big wealth managers are using their competitive advantage," said Stephen Prendeville, director of Forte Asset Solutions, a brokerage for the sale of advisory practices.

“They have bought everything they can from their aligned practices and are now looking externally," he said. “They have become a lot more aggressive."

He believed financial stress rather than increased regulation was forcing many practices to consider their future.

The total number of advisers fell for the first time last year from a mix of poor market conditions, less recruiting and the prospect of tougher regulation which had accelerating plans for older advisers to leave the industry.

The non-bank tied channel, dominated by AMP and its subsidiary AXA, has posted gains of about 7 per cent in the past five years and more than 3 cent in the past 12 months, despite speculation about defections following the merger of the two companies.